Pay off student loans or save for downpayment

Why are you assuming that you should be buying?

I'd actually prop up your retirement funds before anything... these are the best times to be putting away so you can compound, and $50 is really not much, even for your age. I'd max out your 401k first, then look for other uses.

Once you've done that, think about the rent/buy tradeoff and what you are looking to do.

I was in a similar boat. Your student (and car loan) are the last things you should pay off. Both are really just at the long-term (WW2 to now) rate of inflation, and your wages and investment income should, in both nominal and real terms, grow at a higher rate than this interest expense.

Especially if you buy with an FHA loan, your ROE should far outstrip interest payments. If not, you loose very little.

You should maximize your tax-deferred retirment contribution, then your taxable investments, and have a portion of the latter in less-risky things you can liquidate when you need to make a down payment.

That is my two cents. Others may differ.

oxymoron: "Stable job as an attorney at a large law firm."

Respectfully disagree. You're very young. Remove the student loan debt - and live at (or preferably below) what your income level might suggest....

Matson, considering you are noting what is against the general wisdom, do you have anything to actually support your argument?

What does being young have to do with not making sound financial decisions?

Remember, the student loan debt doesn't disappear unless you pay it off. The rules relating to student loan debt are more onerous than any other form of debt.

My argument is that bluepanda carry as little debt as possible (particularly that much in student loan debt) in a time where one could be out of a job - for a long time - in a New York minute. That, in and of itself, is enough support for my argument to my way of thinking.

My general wisdom relies first on being able to sleep well at night knowing I don't have the specter of a debt equal to about 25% of my entire current annual pretax take-home pay hanging over my head (a mortgage would be the only exception to that, but you and I are in broad general agreement that this may not be the best time to buy, anyway - but that is based on a case-by-case circumstance).

After bluepanda is basically debt free (I won't address the wisdom of a $25,000 car loan here), then I would max out the 401K - AND set aside 10% (minimum) of PREtax earnings for savings/investments.

and...

don't eat steak

or fried chicken.

practice safe sex or better yet no sex.

no smoking and no recreational drugs.

don't pay off those loans. these (real) rates are negative.
Do not contribute 401K. it's a scam to feed wall street with fees forever and when you need the money you feed the governement with (income) tax.Nothing in it for u.
and yes no drugs

Sarcastic?

not at all

Ok

Don't pay off loans. Don't save.

All well and fine as long as bluepanda keeps their $210,000 salaried job and bonus. If they lose the job, are out of work for a year, have to take a new job where the salary is substantively less, have to move, are ill, ANYTHING - and those student and car loans are still hanging over their head, well, that's an entirely different story....

Everyone always gives advice on these threads ("...don't pay off those loans. these [real] rates are negative...") as if life is always going to be a best case scenario - you'll indefinitely keep that high paying job, keep getting a bigger bonus, keep getting a bigger raise, and nothing in this economy could ever go wrong, your job could never be in jeopardy, you could never be in an accident, etc.

matson, one interesting case study in advice was Suze Orman who always told people to pay off high interest rate debt, but ultimately when credit was being revoked from many in recent history told people to KEEP their credit card debt because of the greater flexibility than if they reduced their cash balances.

who said don't save? never said that. just said not in a 401k. pay the (small) tax and save (or better invest). taxes will only go up in the future.and when you need it the most you get slaughtered. that's the govnment plan.
I stopped contributing a few years ago to 401k. but a save like a maniac and put it in physical commodities and (mostly) rental RE.
when your assets are far greater than your (negative fixed rates)debts you can withstand life without much income.
She asked for advice: she should get the whole spectrum and decide. not standard wall street bs

sounds like you might be a third or fourth year associate? btw, those bonus numbers just suck. but, anyway, congrats for paying down so much of your loan burden. the real rates aren't exactly negative, but they may be sometime in the future. what kind of place are you looking to buy? remember you're always able to borrow $50k from your 401k for just about any reason, and i'd think that would take care of any fha downpayment you might require (not that i'm recommending that, mind you) as long as you have six months carrying costs in cash.

i wouldn't tie yourself down just yet. things are still kind of rocky, and you don't really know the trajectory of your career. yes your job may be more stable than many (although it definitely depends on the firm) and yes most decent employees can find a job if their firm implodes. you have time. do both, pay down your debts and contribute to your 401k to the extent you can. if it's a choice between one or the other, implying a constraint on cash, now is not the time to buy.

huntersburg: Interesting - and I think you're right, in that there certainly is no 'one size fits all' kind of solution. I didn't mean to suggest that, so I apologize if I came off that way.

But in this case, because bluepanda can knock this out of the park easily now, my opinion is at is. Now - if bluepanda says that they'll put $45,000 in an investment that will beat the 3.5% interest GUARANTEED, and hold that in reserve so that in a worse case scenario they can kill that debt if they have/need to later on, then I could get behind that too....

No need to apologize - I don't think that's normal on an anon. message board.

I'd pay off the debt. Like I said, student loan debt is debt that doesn't disappear unless paid.

matsonjones, the 401k contribution doesn't need to make a dollar to be far more profitable than the 3.5% interest rate. it comes with a tax benefit that makes it far more valuable than any immediate investment possibility.

That's reasonably naive when considering the risk that matsonjones is suggesting is present, and even naive when considering your parenthetical statements, "yes your job may be more stable than many (although it definitely depends on the firm)".

took a peak, suze orman, yeah. you go financial wizard.

matsonjones, do both at the same time. unless there is nothing that can give you any benefit from investing, do so. and a twenty or more percent tax break just for moving your money into an account that generally has numerous options without much penalty for volatility (yours and theirs) is hard to resist.

>took a peak, suze orman, yeah. you go financial wizard.

Oh really? What are your credentials? Extorting real estate developers for advertising dollars on your own site? http://streeteasy.com/nyc/talk/discussion/14968?page=5

oh, idiot, you can get the money back out in the event of a disaster. you certainly may not be able to sell your FHA property.

but keep it up, troll.

>matsonjones, do both at the same time.

Brilliant

you have some credentials, as a troll and an asshole. keep it up.

you are the nastiest piece of work here. good job.

Excuse me?

I don't try to extort developers to pay me protection money by posting negative comments until they advertising on my own site.

yes, actually, it was brilliant. why does the financial decision have to be one or the other? never heard of trying to accomplish multiple results? you're stoopid.

What are your credentials? You seem to give legal advice and personal financial advice.

Are you a lawyer?
Are you a CFP? CFA? licensed broker?

are you? what are your credentials? why do you post here? do you think you are an expert?

keep going. you're just hanging on my every post, you sad fuck.

>you're just hanging on my every post, you sad fuck.

Why didn't you disclose your relationship with another site that takes advertising money from developers before you went and virulently criticized Azure?

sorry, bluepanda, i'm done. but i don't either is a great idea. you're young. things are not so steady. do yourself a favor and pay for an SE subscription, if only for a month, and spend hours looking at what has happened since whenever (you can choose 1996, 1998, 2001, 2004, 2005, 2006, 2008).

Are you operating within the ethical boundaries of your profession when you fail to disclose your associations?

um, how would that be a conflict? as azure is not an advertiser, what am i doing to illicitly encourage advertising? how have i been hiding my identity?

my dear good lord you're stupid.

Have you consulted your company's counsel or compliance division about your behavior toward developers who don't advertise with your site?

what are your associations? really? when have i ever failed to disclose my associations? i certainly don't tout them, but that's to avoid spam. and i ask you again, how is it relevant here? i asked the husband, a litigation partner at one of the top firms, and he snorted. he's kind of interested in finding out if he can get your info with some court order due to slander/libel issues. certainly it might be possible at least during discovery to find out who you are.

You own a car in NY? Sell it and save the money. I have a car because with a family it's very useful. But it costs a lot to own a car in NY (garage, payment, insurance, etc). And if you're single, do you really use it?

I agree about the risk of student loans. Can't be crammed down in bankruptcy. Penalties can cause the debt to skyrocket if you for any reason cannot pay for a while (eg unemployment). $300/month is pretty doable, even in tough circumstances, but still.

Do not buy a place until you know with a high degree of certainty that you will not need to sell within 5 years. What if you have kids a year or two after you buy, for instance?

When criticizing Azure, why didn't you disclose your affiliations?

Now you are threatening me, interesting. How far will your shakedown go?

> slander/libel issues

namely?

who knows? depends. keep pushing.

i have very, very good free legal help.

keep pushing.

No, actually you don't have any free help. A litigation partner in a top firm has not only his reputation and partnership economic interest at stake, but also, ... well, it's a partnership.

you are so wrong. really. you think that popular press would support you over me? troll?

believe me, it would be a HUGE human interest story, yes i have a salty vocabulary, but that's not, despite your fixations, the focus of this story. it would be one popular website that somehow couldn't control it's demons. and tried. and still the poor little forlorn troll that had no other life tried reincarnation and got slapped down yet again.

se isn't there yet, but if you have a little bit more frustration, which you don't deal with at all well, we shall see.

popular press?

I thought we were talking about money. Yours.

and now i'm done. i hope you find inner peace someday. on your deathbed.

Are you or are you not trying to extort money from Azure?

Is your husband prepared to put his partnership on the line (i.e. "free" legal help) for your actions?

And lastly, if you are operating without the consent of the web site you are affiliated with, have you at least informed them of this appearance of a conflict or actual conflict?

am i trying to extort money from azure? you are out of your fucking mind. and there has been no proof of it.

that's slander. and maybe libel. you have zero proof and i welcome discovery.

>and i welcome discovery.

Oh, me too.

really? i doubt it. you're all blog and no reality.

> you're all blog and no reality.

Sounds like NOT "slander. and maybe libel," right?

OP "Should I be trying to just pay off my student loan and car loan off asap?..."

Yes, pay off your student loan first and then your car loan. I would try "slumming" it for a few years in a relatively "cheaper" rental and location accommodations in order to say for your eventual home purchase.

I also agree about NOT contributing to your 401k. 401k's are a weak retirement leg to stand on due to the the fee's wall street and money managers deduct from it. 401k is the poor mans (read: poor/cheap employer) way around the once rock solid pensions private (not government) companies gave to their employees - both blue and white collar. Though, pensions seem only good for blue collar union jobs and government jobs now which hopefully will be changing soon.

Investing now is like it has been in the past - diversify your portfolio and spread your risks.

say = save

Newsflash: if he loses his job, he loan payments are deferred. He does not have to pay until he gets a new job. And he will WISH he had saved up more when he loses a job, rather than pay $100k or so in debt.

Dummies.

hunter: Now you get it. This is what SE is.

THIS IS STREETEASY!!! YOU DON'T NEED TO TAKE IT TO YOUR DEATHBED!!!
Blog on, hunter.

Nice to see that you don't give up/in to the threats, huntersburg.

bluepanda, just do whatever feels comfortable to you. In your situation, that's all that matters because you have been doing very well thus far and will continue to do well all by yourself.

bluepanda,

What have you decided to do?

Payoff your student loan and car note, which order, that is for you to decide. By paying your student loan balance early, you will save money on interest. With a car, interest, typically, fixed at a set rate, on the sold price and interest is deducted from the balance uneqivocally. Once you payoff those bills they will be GONE, creating, additional money and savings for you. Have you thought of creating a detailed budget? Now, that you are in your 30s, take saving more serious than you did in your 20s. Do not forget, enjoy life you only live once!

simple analogy: you owe money to two loan sharks. one is bigger than the other. and you're now debating to borrow even more from a considerably larger shark who requires a deposit to get that extra money just buy your first home... what do you really own if you owe everyone else? heed the advice you're getting from mutombonyc and the similar... good luck!

live within your means--and your means must account for your debt--save your ass off now!, until youve enough to pay off debts, and still have savings in case of layoff or other emergency---and within your means, given your debt, means to have bought a used car for cash--and a car WTF?--youre a lawyer at a big firm--you work, what? 50-70 hours a week--and you have a car you barely use, which coasts a fortune to maintain, garage, insure etc in NYC--the last thing you want now is MORE debt, taken on to buy a leveraged illiquid high-risk asset--rein it all now and keep it all reined in until you are above water

and beware of thinking your income is "stable"--the economy can turn hard, suddenly--and there are plenty of outliers to consider--illness injury--unforeseen pregnancy--whatever

and you probably have little family safety net, given the education loans--debt is debt--anti net worth--get some real net worth..with discipline

The most relieved I have ever been was when we paid off our student loans. When we have kids, we'll tell them what a waste out-of-state tuition is. I may as well have gone to a private school. Oh well, live and learn.

Also, I recommend on getting rid of your fancy car. What kind is it - a BMW?

I was in the same situation. Definately pay off your students loans. First, although you think your job as an attorney is stable, the past 2-3 years indicate otherwise. Also, there is no guarantee you will keep up your current earnings. Once you become a 8-9 year, many firms quitely suggest you move on if you will not make partner. There is a good chance you will end up at a smaller firm that doesn't quite pay the same salary (not a bad firm - there are lots of very good firms, many based outside NY with sizeable NY offices that pay less than 'biglaw'). My opinion (and this is what I did) is that you should payoff off your student loans in full, max-out your 401(k) every single year and then save for an apartment. I think you should also have at least 12 months of living expenses in the bank after you close and cover the closing costs. That way, if something does happen (and I know lots of really good attorneys at top firms who NEVER thought it would happen to them) you can rid-out of the bad times. It doesn't sound glamerous, especially when you have friends who do buy a place, but I know I feel much better knowing I am debt free, have a large retirement savings and money in the bank. Housing costs (in my opinion) will stay the same or come down in the next few years, so (unlike a few years ago) the apartment you want today will still be there in a few years at the same or lower price. Just my two cents.

If you're not already doing so, you should max out your 401(k) first. The people telling you not to do this are, frankly, idiots. There's no other option that comes with the instant ~40% boost from the tax deferral, and your returns ought to outpace interest rates on your student loans in any case. You may also be leaving employer match on the table.

I'd probably pay off the car loan next--it's likely the worst interest rate and isn't deferrable if you lose your job. Finally, depending on the nature of your student loans (e.g., fully private loans with higher interest rates) it may be worth accelerating some of those payments, but there's probably not much value in paying off low-interest government-backed student loans other than for peace of mind. I'd probably build up savings rather than paying those off.

Remember when you take out an FHA loan, there are a lot of costs. For one thing you have to get mortgage insurance, and mortgage insurance is expensive. Nevertheless people take out these loans, since it's their only option.

But in your case, you can avoid these costs, and that is to save for your down payment. Now is a great time to buy an aparmtnet.

Mortgage Broker
www.esfunding.instantlender.com

Thanks for all the helpful comments. A lot of people in real life are telling me that "now is a good time to buy" and "just buy a place that is equivalent to your rent" and "this will really help with your taxes." Ignore them?

I guess I really am the only one in a simlar boat. His student loans have obviously been consolidated and will ALWAYS be 3.5% interest. It makes no sense to pay such a low interest loan off first.

Second, AGAIN, if he does get laid off, his student loan payments will be suspended. Not so his other bills! So he is better off saving outside the 401k than accelerating loan payments.

Third, as jordyn points out, the 401k is automatically boosted 40% due to tax treatment, and if there is a match to boot, its basically double what you could have gotten after-tax, before he earns anything on the investment.

Plus it's sheltered from capital gains taxes while in the 401K, so there's an ever-compounding boost from that (in the event of gains) vs. saving outside a 401K, and 401Ks don't need constant rebuilding of closet interiors with really high-end luxury fittings.

And plus also when you leave current employer, you can opt for a very broad range of self-directed investment choices.

Do you need the car to commute or is it a luxury item? I think you should own a home before buying a car in NYC. The amount you pay in car payments, insurance, maybe even a garage payment, could pay half your housing expense. There is no reason to pay more than $200 per month for transit in NYC. Heck, I get to the airport for like $12. Invest in a bicycle.

Also, like I've said for about a year now, invest in stocks and save for a down payment on a home. You'll be glad you did. The interest rates on your loans are reasonable. But your car loan is short term, and you might pay it off if you ditch the car.

The more conservative move would be to pay of the debt, which is the route I would recommend in your situation. I would leave the $50k as a cash reserve and pay down your student loan at a faster pace. Once your student load is paid off, you can reconsider the rent vs. buy question.

I'm a big believer in maintaining financial flexibility and living below your means. Things change all the time and it is nice to be prepared for it.

swe, curious on your logic to pump up the 401k. Seems like an odd recommendation from someone with a high financial IQ.

I agree that having a car in New York rarely makes financial sense, but the car is probably worth less than the loan at the moment, so it's a bit of a sunk cost. Still, that doesn't mean that you should throw more money at the problem--when I moved to New York I ended up letting my parents use my car for the remainder of the lease so I didn't have to keep paying parking, insurance, etc.

"Also, like I've said for about a year now, invest in stocks and save for a down payment on a home. You'll be glad you did."

Yes, right up until you lose 15% of your downpayment exactly when you want to use it.

I'm not sure I understand the hostility towards 401Ks. Can someone explain?

All right: it seems nobody here wears any inflation goggles. So sweetpanda (nie se chung koi ren ma?)please read the 3 little pigs story here. I know quite a few "rich" people and none from a 401k. yet very wealthy landlords. but who knows?

The Great Game, Gold Arbitrage and Three Little PigsBy: Daniel Amerman | Tuesday, March 13, 2007 An astute reader from Atlanta named Ken recently wrote the following in a letter to me:

"It seems that the game plan (for financial heavyweights) is to buy assets, real things that can't be papered away by the gov't, and pay back with depreciated dollars."

Ken gets it. Ken understands the Great Game as it is being played at the highest levels of our monetary system. The Game has two halves: going long the real, and short the symbol. That is, going long real assets by owning them, and going short the dollar and the financial system by selective and advantageous borrowing. That way if you are a hedge fund manager, CEO or "private equity" investor who has essentially gambled the world monetary system on your speculations, and you collapse the financial markets and the value of the dollar when you guess wrong - you don't jump out the office window. Instead, you enjoy an extraordinarily lucrative early retirement. Because you still own the real - and by destroying the value of the dollar, this just means that you no longer have to pay back most of what you borrowed to buy the real (in inflation-adjusted terms).

As an example, a financial "heavyweight" borrows $1 billion to buy $1 billion in real assets. If asset inflation continues, the asset climbs to $1.5 billion, he sells the asset, pays off the $1 billion borrowing, and walks away with half a billion. If the credit bubble he used to buy the asset unwinds and destroys 80% of the value of the dollar in the process -- no problem! He still owns a real asset that climbs with inflation, so it is now worth $5 billion in future dollars, while he only owes $1 billion. So he sells the asset, pays off the borrowing, and walks away with $4 billion as a reward for his contribution to the credit bubble. (A better way to look at this is in inflation-adjusted terms, where the asset maintains its value at $1 billion, inflation shreds 80% of the value of the $1 billion borrowing, knocking it down to $200 million, and thereby creates $800 million in equity in real terms). There are a number of simplifications in this example, but that is the essence of the Great Game.

The question then is - how do you personally react to this situation? One response is to loudly and frequently express outrage at the situation. That is a most justifiable response. Another response is to take your piggy bank and try to hide it somewhere where it won't be destroyed by the games other people are playing. That is a most understandable response. Still another response is to say: "I wish this wasn't happening, but it is, so how do I personally profit from it?" That is the most advantageous response.

THE THREE LITTLE PIGS

That "personal profit" part probably sounds pretty good. But, if we personally don't have the millions and billions to directly access the capital markets and play the Great Game - how can we join in the profits? For an answer, we are going to travel back in time, re-examine an old children's story, and explore the little-known key to how millions of households turned inflation into net worth.. The time we will travel back to is the last time inflation raged out of control in the United States, and most particularly, the period between 1972 and 1982, when the dollar lost 57% of its value over 10 years. The children's story is the Three Little Pigs, with the big bad Wolf being played by Inflation. For the Three Little Pigs we will meet three brothers: Dave, Mike, and Jim. Each brother accurately sees the Wolf of Inflation on the way, and each tries to protect himself by building a different kind of financial "house". That is our first variant on the children's story: we are going to ignore the millions of households who don't believe the Wolf is coming, and who lose their savings portfolios of straw and wood as a result. Instead, we will concentrate on historical brick-house performance.

The three Brothers each inherited $9,000 in 1972. Each had already used a mortgage to buy a home in 1969, there was a bit of a run-up in inflation and housing prices already by the early 1970s, and the value of each house by June of 1972 was up to an exactly average (rounded national median value) of $18,000, with a $9,000 mortgage outstanding. So each brother started with $9,000 in cash, a $9,000 mortgage and $9,000 in home equity.

DAVE AND HIS HOUSE OF STOCKS

Brother Dave was a well read and educated kind of guy, and being financially sophisticated, he knew that common stocks were not only the key to long term wealth, but were an excellent hedge against inflation. So our first Little Pig sold his house, got his $9,000 in equity, and combined it with his $9,000 inheritance to buy $18,000 in stocks. Being sophisticated, Dave didn't tried to beat the market, but instead bought a well-diversified basket of common stocks, one that precisely tracked the performance of the Dow Jones Industrial Average. The Dow was at 929 in June, 1972, and after ten years of inflation averaging 8.73% -- it was at 812 in June of 1982. This meant that the value of Dave's portfolio had fallen from $18,000 down to $16,000, a loss of 13% over the ten years (the more precise value would be $15,733, but we are generally rounding to the nearest thousand).

Dave was disappointed to see that his stocks had not done as well in fighting inflation as the finance professors had indicated they would, even in nominal terms. However, Dave was downright horrified when he remembered to do what the newspapers so often forget, and converted his stock price performance to real dollar (inflation-adjusted) terms. By 1982, after ten years of inflation, the dollar was only worth 43 cents in terms of 1972 dollars. So when Dave took his $16,000 ending value in 1982, and converted it to constant 1972 dollars, he found that his ending stock value was only $7,000. In real terms, Dave had managed to lose $11,000 of his $18,000 starting investment - meaning a real loss of 62% - by relying on common stocks to beat inflation.

(The percentages are based on the actual numbers, not rounded to the nearest thousand. The cost of housing for Dave for ten years and stock dividends are two of the many items left out of this simple educational illustration, see "Assorted Caveats" below for some more discussion.)

MIKE AND HIS HOUSE OF REAL PROPERTY

Brother Mike was a cautious kind of guy who didn't believe in either the stock market or being in debt, but did believe in the value of real property in times of inflation. So our second Little Pig took his $9,000 inheritance, paid off his mortgage, was now debt-free, and hunkered down in his $18,000 house to await the storm. The Wolf of Inflation blew hard and battered the dollar, the economy, the markets and personal savings for ten long years - and by June of 1982, Mike's house was now worth $41,000, again the exact national average. So, Mike made an apparent profit of $23,000 or 125%.

Mike felt pretty good about how his house withstood the ravages of inflation. Until he ran the numbers and took into account that a 1982 dollar was only worth 43 cents in 1972 dollar terms. Adjusting for inflation, Mike's $41,000 house was only worth about 17,500 in 1972 dollars - he had lost $500 (or 2.5%) in real terms over the ten years. For the problem was that by 1982 average mortgage rates were up to 16.70%, being able to afford a mortgage payment was a major problem and because of this, housing price inflation was not quite keeping up with general price inflation during the peak times (something we would all be wise to remember).

Now, this is not to say that Mike did poorly. He almost maintained the real value of his investment during the most powerful bout of inflation in recent American history, and he did have a place to live for ten years without making mortgage or rent payments, money that he could have used for investing. But owning the house, debt-free, did not directly make him money in inflation-adjusted terms.

JIM AND HIS HOUSE OF GOLD, PROPERTY & DOLLAR-SHORTING

Brother Jim liked real estate for fighting inflation, and he liked gold too. Our third Little Pig wasn't thrilled with debt, but he did have a bit of a brainstorm. "Jimbo," he thought to himself, "if I am convinced that the value of the dollar is going to be plunging - why should I pay off my debt now, when the dollar is expensive, when I could wait and pay off my debts when a dollar is cheap?" So, Jim did not pay off his mortgage - he refinanced it up to $14,400, using a 30-year fixed-rate mortgage, which brought it up to an 80% loan-to-value. He then took the $5,400 he pulled out of his house equity, added in the $9,000 he inherited, and used the combined $14,400 to buy 232 ounces of gold, at the then current price of about $62 an ounce. (The price is as of June, 1972, to keep comparability with the housing and inflation numbers. Yes, gold did not become legal for individual Americans to own until January 1, 1975, but we're treating it as if they could, to properly capture the inflationary period over a full ten years.)

So Brother Jim had a starting position in 1972 of owning an $18,000 house, owning $14,400 in gold, and owing $14,400 in a long-term and fixed rate mortgage. The Wolf of Inflation huffed, and puffed and blew hard for ten years, and three major financial changes worked together to dramatically change Jim's net worth by June of 1982. The first change was that the value of his house had climbed to a nationally average $41,000, just like Brother Mike, meaning it did not quite keep up with inflation, but lost about $500 in real terms.

The second financial change was that owning gold grew quite popular after ten years of sustained high inflation, and by June of 1982, gold was up to about $315 an ounce. This meant that Jim's 232 ounces were worth about $73,000, meaning a nominal profit of $59,000, or about 407%. When Jim adjusted for inflation, he was much happier than Mike, for even after discounting 57% for the decline in the dollar, Jim's initial $14,400 had turned into $32,000 for a profit of 120% in real terms.

The third financial change, was that unlike Mike or Dave, Jim had borrowed the equivalent of his 80% of his net worth in a fixed-rate mortgage, that effectively constituted a long-term, tax-advantaged and relatively low-cost short on the value of the dollar. By 1982, inflation had shredded 75% of the value of that mortgage, including both the depreciation in the value of a dollar, and the value of having a long term loan locked in at a far below market rate. So Jim's debt had fallen from $14,400 down to $3,000 in real terms.

JIM'S WEALTH & ITS SOURCES

Adding it all up, Jim's net worth in nominal terms went in ten years from $18,000 to $101,000, when we add the $73,000 in gold to the $41,000 in house value, and then subtract the $13,000 in remaining mortgage outstanding. When we look in nominal dollar terms, it appears that Jim made his money in gold and housing, while the mortgage paid down a bit. However, when we adjust all three factors into real dollar terms, we see that:

Jim made about $17,500 on his gold investment (1972 dollars)

Jim lost about $500 on the value of his house

Jim made about $11,000 through inflation shredding the value of his mortgage (and a bit of mortgage amortization)

When we add these up, we find that Jim's net worth has climbed from $18,000 up to about $46,000 in real terms, meaning an inflation-adjusted total return of about $28,000 (155%) over the ten years of sustained inflation. Jim simultaneously went long the real and short the symbol, and when the symbol (the dollar) then had a loss of confidence and plunged in value - Jim's net worth soared as a direct result.

While the first Little Pig lost 62% of his net worth investing in common stocks in inflationary times, and the second Little Pig lost 2.5% in real terms through owning real estate - our third Little Pig turned those problems into a 461% nominal profit, and a 155% real dollar profit. As an individual of quite limited resources, Jim played the Great Game and played it well.

THE GREAT IRONY

Gold did excel during the inflationary 1970s and 1980s, as it may again if another round of major inflation awaits us. This performance is well known. The irony, however, is that gold is not where most households made their money. As documented in the newly published book, The Secret Power Within Your Mortgage (more information below), when we track exact national averages from 1972 to 1982, the average homeowner saw their real equity grow from 25% of their mortgage amount to 500% of their mortgage amount as a direct result of being effectively short the dollar during a sustained period of relatively high inflation - even while real estate prices where slightly declining on an inflation-adjusted basis.

This extraordinary growth is far from theoretical. The inflation-driven destruction of most of the value of the outstanding mortgages was what nearly destroyed the Savings & Loan industry back in the 1980s, and the author spent years as a young investment banker trying to help savings institutions survive the massive damage. Indeed, this event constituted one of the largest transfers of wealth from institutions to individuals in American history. You likely know someone who held onto their house for decades over this era, and became "house rich" as a result, enjoying the benefits of a huge equity with their home even as they made little $50 or $100 monthly mortgage payments long after the national average had moved to over $500, then up to $1,000. Yet, to the extent people think about it at all, they often mistakenly believe this increase in personal wealth was a result of the run up in home values (which merely more or less kept pace with inflation), rather than inflation effectively forgiving most of their largest debt and making most of their payments.

CHECKING THE BACK DOOR

Sometimes if the front door is locked, you need to check out the back door. If direct asset purchases are problematic, and your net worth is equal to your assets less your liabilities - liability management becomes your back door. A back door which is standing wide open -- and constitutes a highly effective way of shorting the value of the dollar in a long-term and tax-advantaged manner. It is this back door that created enormous amounts of homeowner wealth the last time inflation went out of control in this country. It is creating the back door that is key to the Great Game as it is being played right now, for when it finally unwinds - the back door of inflation shredding the value of the debts is what will allow many of the people who created the problem to walk away wealthier than ever. In some cases this will be accidental (as it was for most homeowners in the 1970s), but for the more astute investors this is quite deliberate - as it needs to be for you, if you are to enjoy the same protections and profit potential.

When you put a "back door" on your long-term wealth preservation and creation strategy, then you have a 1-2 combination. The assets you lead with are then a matter of choice, and the effectiveness and costs of this strategy will vary widely with that choice. Gold, the choice for Jim illustrated above has powerful advantages for near term and major inflation - but is also quite expensive in terms of cost of carry, as you won't have interest, dividends or rental income to offset the mortgage payments. There are pros and cons to gold as there are with a diverse range of alternative investments. Indeed, there is a good case for a diversified basket of contrarian investments for the assets.

ASSORTED CAVEATS

This educational essay occupies a kind of middle ground, being long enough to explore a few aspects of an innovative and moderately sophisticated financial strategy - but not long enough to even begin to explore all the associated complexities, which are not technicalities but will be vitally important to determining the final results. As one example, consider leaving the dividends out of Brother Dave's stock strategy. Yes, it is true that the real source of inflation fighting power for common stocks over the long term is dividends, and their assumed reinvestment and exponential compounding over time. Which is precisely why there is no historical evidence that common stocks at current historically puny dividend levels are an effective investment for fighting inflation. From there, we could go on for multiple chapters or even books, in properly exploring that issue. (Chapter 6 from the author's 1993 book, "Mortgage Securities", is a good start.)

The investment advice disclaimer below is very important, and should be read carefully. A small selection of the many other important issues necessarily left out of this essay are the cost of housing for each of the three brothers, the value of the free cash flow for Mike, tax implications of each strategy, and the impact of moving on homeowner returns.

Some of the numerous issues that we haven't had time to touch on here, are explored at length in the book linked below. Some of the most important of these issues revolve around finding the balance between profiting from turmoil and surviving turmoil - excessive debt or the wrong kinds of debt will increase your risk, not decrease it.

The full title of the new book referenced in this article is "THE SECRET POWER WITHIN YOUR MORTGAGE: Use Historically Proven Methods to Protect Your Net Worth Against a Fall in the Dollar & Prosper During Inflationary Times - Updated With Modern Hedge Fund Techniques & Optimized With Your Insider Knowledge". The book spends 3 chapters reviewing in detail what actually happened with mortgages, inflation, and homeowner wealth during the 1970s, and then takes 12 chapters to discuss and illustrate the practical application today of those principles for homeowners and investors. The book can be found at the website MortgageSecretPower.com , and a free 26 page sample chapter is available for download there. Daniel R. Amerman is a Chartered Financial Analyst with MBA and BSBA degrees in finance, and almost 25 years of professional experience in working with mortgages and investments. His primary website is The-Great-Retirement-Experiment.com , a series of pamphlets, articles, recordings and books that are dedicated to taking a holistic and people-based look at the long-term future of Boomer finances. Website: http://mortgagesecretpower.com/.

"All right: it seems nobody here wears any inflation goggles. So sweetpanda (nie se chung koi ren ma?)please read the 3 little pigs story here. I know quite a few "rich" people and none from a 401k. yet very wealthy landlords. but who knows"

That's just stupid. 401(k)s aren't designed to get you rich. You can't put more than $16.5K a year in them. There's a lot of people who have made a lot of money in just the types of investments that 401(k)s allow, in fact, and the historical inflation-adjusted returns are vastly better than for housing.

But yes, if you think there's going to be hyperinflation, you should borrow as much as possible and invest in things whose prices will increase with inflation. Of course, if you're wrong then you'll end up with a crushing debt load and nothing to show for it, but who cares about the downside to any investment strategy?

jordyn u read so fast. did u look at the images? I have color pencils here for you.

1. Sell your car. 2. Max out 401(k) in Vanguard funds if you can. 3. If need the car for work, do not accelerate repayment of either loan since both are at favorable fixed rates. 4. Save excess cash until you have enough for a 20% downpayment on a home and 12 mos cash reserves. If you lose job, you will still have the cash to service your debts because you've been saving instead of pyaing off your low rate loans and if you're unemployed you can defer student loan payments. If you are subsequently able to find a job and buy a place, your mortgage is unlikely to be less than the 2.9% on your car loan or 3.5% on your student loan, so you will have more cash to put down as a deposit on a place.

Agree with Jordyn here.

I think the original poster is behind on retirement funds for that age. They're not as illiquid as NYC real estate, they defer tax burdens, and if you're invested in equities the funds should grow with inflation. Plus, the more you invest now, the more the effect of compounding interest / time value of money works in your favor.

That's a convetional view - I can understand the arguments for buying physical assets if you believe in hyper inflation but it seems to me that unless you were stockpiling platinum / gold / corn in 2009 and early 2010 that you're late to the party.

I can understand the temptation to add personal leverage right now. Seems like the economy is actually recovering on many fronts, interest rates are still relatively low and if inflation takes hold it will make your debts "cheaper". The poster is probably fine for job security having survived the past few years but the legal industry (and Wall Street too) is a structural pyramid - up or out.

I'd suggest doing this: pay the minimum on the debts, max retirement savings and make some diversified investments (dollar cost average them) with a decent yield that you use to squirrel away money for your down payment. There are some MLPs (pipeline companies) paying 5%-7% yields, Verizon, Intel, General Electric, basically quality dividend growth companies. I'd also suggest a dividend growth mutual funds with low expense ratios (Vanguard, T Rowe Price) and critically set up an automatic investment plan so you aren't trying to time the market.

Yes, this is a boring investment strategy and yeah, you won't get rich but the odds were pretty long anyway being a lawyer in NYC.

"If you're not already doing so, you should max out your 401(k) first. The people telling you not to do this are, frankly, idiots. There's no other option that comes with the instant ~40% boost from the tax deferral, and your returns ought to outpace interest rates on your student loans in any case. You may also be leaving employer match on the table.

I'd probably pay off the car loan next--it's likely the worst interest rate and isn't deferrable if you lose your job. Finally, depending on the nature of your student loans (e.g., fully private loans with higher interest rates) it may be worth accelerating some of those payments, but there's probably not much value in paying off low-interest government-backed student loans other than for peace of mind. I'd probably build up savings rather than paying those off."

I 100% agree with Jordyn on this. This was/is our exact strategy and rationale.

pandabear - I'm curious what your long term plans are - family? staying in manhattan? continuing to work in the field of law? if you don't have kids now (i'm assuming you don't given how much debt you've been able to pay off - impressive) save your @ss off b/c you'll never see anymore savings once they arrive (unless you make partner :). Best of luck to you.

fwiw, our income also comes from the law. we've always felt that having a nice nest egg provides for the most flexibility (something you need as an attorney in manhattan). if we stay in manhattan, we won't need it. if we leave, we're set.

value of compounding the instant 401k boost makes it a must do--re other investments: you can't lose debt you've paid off

and be wary of automatically invested "balanced" portfolios--don't be a market timer, but certainly try to buy stocks on the dip and in troughs--commodities and stocks have already had a hell of a party--to plow in now would be reckless--great time to pay down debt, period--and get discipline while you can, esp if you plan to have a family--

pay off the car and sell it--max the 401K--save your ass off--and pay down debt as quickly as reasonably possible

RE is going nowhere fast--get discipline, save and pay down debt--there will again be troughs to buy in RE and the stock market--prepare yourself with discipline

Is bluepanda extinct?

>All right: it seems nobody here wears any inflation goggles

nicercatch, have you run your scenario during any other period of time?

No I'm here!

@nicercatch

that is an interesting story. only thing about these types of analyses are the "timing". How would your results look if the beginning if the story took place 1974-1986?

That being said, I agree that we on the beginning of the road similar to the time period you selected.

I agree that in an inflationary period, real wealth is the way to go whether it is RE or gold...interestingly Buffett has discussed inflation at length and he actually likens it to gravity to the overall performance of a stock.

I've been slowly moving towards that direction and opening a solo 401k for real estate and PM purchases also. If you are able to do that I suggest you do it.

Market timing is so easy nyc1234, so easy.

"swe, curious on your logic to pump up the 401k. Seems like an odd recommendation from someone with a high financial IQ."

You don't like tax deferred growth?
Add in the recent advantage that when you switch jobs, you can turn it into a ROTH.

"I know quite a few "rich" people and none from a 401k."

Contributions are limited. Of course, my folks have millions in their retirement accounts putting away dilligently and never making high salaries.

> yet very wealthy landlords.

Who might have been wealthier if they invested elsewhere.

Porshe owners are often wealthy. Do Porsches make you wealthy?

Do Volvos make you safe?

My 997tt is a reflection of not sitting on a deleveraging asset. The greatest bubble popping if you haven't heard. Just look at your w_2 fktard.

Do red cars make you speed more?

Correlation (although with the Volvos, a little causation, too).

do brains make you smart? it really depends.
"401k" are a generic term. for business owner you can add "profit sharing plan" up to 44k /year (above200k of income. i cite from memory don't quote me),as well as "cash balance" plans (not really limited/ as a defined benefit to partners.we do 25k/partner/year but could do more)...the problem is the tax slaughter waiting as an income tax, likely much higher than they are now, just when you need the money. statistical game of course. I wouldn't bet on roths keeping their status until the end.
I'm not even mentioning a bankrupt governement forcing completely captive retirement entities into US treasuries or(god forbid)annuities. It happened in Argentina in 2001 France 2010 Hungary2010. so easy to do. all in the name of "safety".

All these standard wall street propaganda (which works from what i read on the post):pay your debts, save in my vehicles (my 2% of CAPITAL fee/year) then give it all to the governemt does not do it for me.particularly the complete absence of leverage and the non tax advantage position . If you check who devised the ERISA law structure (401k403b...)you will know who benefits.

And all the montecarlo calculations of retirement/contribution/age blabla, never truly account for inflation.
The 3 pig story is very interesting because it happened with an inflation of 8.7%. I think we're shooting for double digits in the near future.

My take I know. (soros and paulson's largest positions by far are PM).
But financial education is always interesting, no matter what. Always better than standard wall street lies and propaganda.
Porsche owners on wall street are often wealthy in inverse relation to their customers.

And yes Panda died.

as for the time period this was the last higher inflation period in the western world. desinflation after that for 30 years. last year was probably (possibly?) the end of the bull in bonds.
my take i know. ladies and gentlemen (and in between for u w67),place your bets.
zaijian panda

Very simple. Be debt free and not worry about getting fired which can easily happen if you are not on the partnership track. I would think that you want to buy a nice place once you become a partner. Before that you are never home anyway. That said FHA loan terms are great as long as you are only buying a place which is 700-800K or less.

i would add that even on "partnership track" (which may not become apparent for another year or two), there are no guarantees. lose the car (why do you have the car??) and save.

"You don't like tax deferred growth?"

I like tax deferred growth, but not more than I dislike non-productive debt. What of this was credit card debt? Would you change your recommendation with a different interest rate sensitivity?

Credit card debt? If he had it, I would have recommended he kill it asap. But he's got loans at 3%.
Not sure where you are getting that from. OF COURSE if he was paying 20% it would be a different story... but that's not what we're talking abou here.

I'd take putting that money tax deferred to take advantage of the compounding. You can't put that same money in later. He should be maxing out the contributions now.

I think the OPs post on this is fake. "bluepanda" log-in name was only created Jan 25, 2011 and he created one post with one comment - this one.
http://streeteasy.com/nyc/talk/search?search=bluepanda&commit=Search

I have a strong suspicion "bluepanda's" circumstances are made up by a journalist or a blogger in order to create a story. Yes, panda is dead....

A journalist? Really can't be that slow of a news day, can it?

Isn't it reasonable to think he's just now shopping around, and created the account primarily to ask the question??